Debt Advisers Direct

Debt Advisers Direct

March 24, 2009 08:11 ET

IVA Could Help Struggling Borrowers Avoid Bankruptcy

LONDON, UNITED KINGDOM--(Marketwire - March 24, 2009) - Responding to new figures from the Ministry of Justice showing that the number of people seeking bankruptcy rose by 32% in the final three months of 2008, Debt Advisers Direct has said that people with unmanageable debts should ensure they speak with a debt adviser to discuss all options before making a final decision, and added that an IVA (Individual Voluntary Arrangement) could help people avoid bankruptcy if other debt solutions are not appropriate.

The latest 'Company winding up and bankruptcy petition court statistics' report from the Ministry of Justice showed that 15,358 people applied for bankruptcy through the courts in the final quarter of 2008, up by 32% compared with the same quarter in 2007, and a 12% increase on the previous quarter.

A further 4,772 creditors' petitions, in which the lender asks the courts to declare the borrower bankrupt, were issued between October and December 2008 -- an increase of 3% on the final quarter of 2007, but, perhaps more interestingly, a 15% decrease compared with the previous quarter.

It's unclear what caused this fall in creditors' petitions, but it may have been due to Government requests for more leniency from lenders with regards to legal proceedings. Alternatively, since bankruptcy forces the repossession of the borrower's home, it could be because falling house prices have made bankruptcy a less appealing option to lenders than other debt management arrangements.

A spokesperson for Debt Advisers Direct said: "Bankruptcy is generally considered the last resort for anyone struggling with their debts, since it usually leads to the repossession of the borrowers' home, and can severely limit access to further credit for a number of years after the bankruptcy.

"That said, in some cases bankruptcy can be the best option for the borrower. Borrowers are usually discharged from bankruptcy within a year, and it essentially writes off most or all of the debt, which can be a huge relief for people who have been struggling with their debts for a long time."

But the spokesperson added that many people considering bankruptcy as a way out of debt may be better off with an IVA.

"An IVA can avoid many of the downsides of bankruptcy. In particular, the borrower will not lose their home with an IVA, and there are fewer employment restrictions compared with bankruptcy.

"However, anyone considering an IVA should be aware that it is a big commitment that usually lasts five years - so the borrower must ensure that they can meet the requirements for the full period."

An IVA is a legally-binding agreement between a borrower and their creditors that enables them to avoid bankruptcy by agreeing to pay off a set percentage of their debts, after which the remaining debt will be written off.

Before an IVA can go ahead, the borrower must work together with an Insolvency Practitioner to draw up an IVA proposal, which must then be approved by creditors accounting for 75% of the total debt.

Although an IVA does not force the repossession of the borrower's home, homeowners with an IVA may be required to remortgage to release some of the equity in the 54th month (half way through the final year) of the IVA.

On successful completion of the IVA, the remaining debt is written off.

The Debt Advisers Direct spokesperson said that while IVAs are a valid way for people to get out of debt, borrowers should consider whether other debt solutions, such as a debt consolidation loan or a debt management plan, could be more suitable for their circumstances.

"Even for people with multiple debts, a debt management plan or debt consolidation loan may be more appropriate so long as the borrower can afford the monthly payments. Both allow the whole debts to be repaid at a more manageable pace, and may not affect the borrower's credit history as much as an IVA or bankruptcy could.

"We advise people struggling with debt that they should always contact a professional debt adviser to discuss their situation. A good debt adviser can help borrowers find the easiest and most suitable debt solutions for their circumstances."

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